1/12/2004 @ 12:00AM

The Great Humiliator

Bears destined to be humiliated: Merrill’s Richard Bernstein; Yale’s Robert Shiller; the famous bond man at Pimco, Bill Gross; and two Forbes columnists.

How long should this bull market last? Until the last bear cries uncle. I’m waiting for most of the big-name investors who were pound-the-table bearish as 2003 began to either capitulate or be publicly ridiculed. That hasn’t happened yet.

The market is the Great Humiliator. It wants to humiliate everyone but has a strong preference for the biggest and most famous.

That’s how the 1990s boom played out. It didn’t–couldn’t–end until the seers who were bearish in the mid-1990s became bullish or were derided as quacks. Longtime bear Charles Clough, Merrill Lynch’s chief strategist, was openly fired and replaced by longtime bull Christine Callies in June 2000. Almost perfect timing–backwards! That was when the two-and-a-half-year bear market was just getting underway.

Over those two and a half years every important bull either caved in and turned bearish or was painted as powerless by the press. Christine Callies took her turn on the execution block. Unbendingly bullish, she was booted for value-based permabear Richard Bernstein in January 2002. Poor Merrill! Self-lynched again.

Other bulls who either gave up or were sent packing: Edward Kerschner of UBS PaineWebber (cameoed in my Oct. 15, 2001 column as a reverse indicator); Jeffrey Applegate, who was publicly squeezed from Lehman Brothers in November 2002; James Weiss at State Street Research.

To kill the bull market that started a year ago, the same eternal invisible hand must unseat most of the current bears. They must either do an about-face, turning bullish, or else be cast out as kooks.

Which bear will be undone first? Merrill’s Richard Bernstein is an obvious candidate. Merrill is a long tradition. Bernstein has done some fantastic intellectual work on market sentiment. I respect him. We owe him. But he misunderstands some aspects of behavioral psychology that underlie his work. And he has been wrong in his predictions. The Great Humiliator won’t care that we owe him for his earlier contributions.

Another likely victim is Robert Shiller, the widely revered Yale academic whose book Irrational Exuberance, appearing on the eve of the 2000-03 crash, was brilliantly timed. Professor Shiller’s admirers forget, though, that he was bearish throughout the 1990s. Another famous bear is Jeremy Grantham of moneymanage-ment firm Grantham, Mayo, Van Otterloo. Then my favorite: Bill H. Gross of Pimco, the world’s most famous bond manager and maybe the best. Early in 2003 Gross authored a widely circulated white paper explaining why stocks were overvalued and should perform poorly. So far, no peep of rebuke! That’s very bullish, because the bear market won’t come until the media attacks folks like Gross.

Some bears maintain their pessimistic proclivities by claiming 2003 as a counterrally in a longer bear market. But my reading of history says the move to date is already too big for the Great Humiliator not to have his way. So buy and hold until you hear that beautiful hum–of bears either turning tail or being humiliated. None of them has gotten really ridiculed, yet. This is not to say that they won’t stand their ground and may be vindicated years later. But until the public turns against them, this most enjoyable bull market has legs.

A great way to participate is by buying money-management stocks. After the current so-called mutual fund scandal is over, these stocks will be higher (see my Dec. 8, 2003 column for more on why this scandal is really bullish). Hence stocks hit by it become buys. One is Britain’s
Amvescap
(14), almost 20% cheaper from the event. Amvescap sells at 2.8 times revenue, well below the 3.5 average for the industry.
Janus
(15) is a pure scandal play, 25% cheaper than before–that after getting pounded for three years. A second-tier but worthy scandal stock is
Waddell & Reed Financial
(22).

Next on my buy list is
Alliance Capital Management
(33), an above-average-quality firm which has been so discredited that it offers a secure 7% dividend yield. But you don’t have to confine your buying to companies that Eliot Spitzer doesn’t like.
Gabelli Asset Management
(39), totally clean, is worth buying because Mario Gabelli is a great money manager.
Affiliated Managers Group
(67), a roll-up of accomplished money managers, is another buy.